Why Use a Trust?

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Why Use a Trust?

Trusts are often perceived as complex legal entities reserved for the wealthy or those with extensive assets. However, the reality is that trusts can be a valuable tool for a wide range of individuals, offering flexibility and benefits that other estate planning strategies cannot match. This is particularly true for U.S. citizens residing in Israel, who face unique challenges and opportunities in managing their assets across international borders.


A trust is essentially a legal arrangement in which one party, known as the grantor or settlor, gives another party, the trustee, the right to hold title to property or assets for the benefit of a third party, the beneficiaries. Trusts come in various forms and can be customized for specific purposes, from asset protection to tax planning and beyond.


Let’s dive into several vital reasons individuals might choose to set up a trust as part of their estate planning efforts. These include:

  • Estate Planning and Avoidance of Probate
  • Asset Protection
  • Tax Planning
  • Planning for Incapacity
  • Control Over Asset Distribution
  • Charitable Intentions
  • Privacy Concerns
  • Special Needs Planning
  • Those Looking to Renounce Their Citizenship


Each of these highlights a unique advantage of incorporating trusts into your estate planning strategy, particularly for those navigating the intricacies of international living and dual-country regulations.


Basic Understanding of Trusts


At its core, a trust is about setting aside assets for specific purposes under the management of a chosen individual or institution, known as the trustee. The trustee is responsible for managing these assets on behalf of the beneficiaries, who are the individuals or entities that will ultimately benefit from the trust. Trusts can be set up during a person’s lifetime (living trusts) or established through a will to take effect after death (testamentary trusts). Being in Israel, though, there is an added level of complexity that comes into play with foreign trusts, so you want to make sure that you have the right factors in place. This includes ensuring you have an excellent trustee for both U.S. and Israeli purposes and setting up the trust in the proper location.

The beauty of a trust lies in its versatility. Whether you’re looking to manage your assets more efficiently, ensure that your loved ones are taken care of after you’re gone, or even support charitable causes, a trust can be structured to meet your specific objectives. This flexibility makes trusts an invaluable component of a comprehensive estate plan, especially for those with complex personal and financial circumstances, such as U.S. citizens living abroad in Israel.


Estate Planning and Avoidance of Probate


One of the primary motivations for establishing a trust is to ensure a smooth and efficient transfer of assets upon the grantor’s passing. Unlike a will, which must go through the probate process, a trust can bypass this often lengthy and public procedure. Probate can be time-consuming and costly, and it exposes the estate’s details to the public, which many prefer to avoid. By holding assets in a trust, you can ensure they are transferred directly to your beneficiaries according to your wishes without court intervention.

This aspect of trusts is particularly important for U.S. citizens living in Israel since Israel has its own probate system. Additionally, a lot will depend on the assets you still hold in the U.S. vs. those you bring to Israel. Suppose you initially set up a trust for state probate purposes but now live in Israel without connection to the U.S. In that case, you may want to revisit the trust.


Asset Protection


Trusts offer a robust strategy for protecting assets from potential creditors, legal judgments, or other financial risks. Transferring your assets into a trust effectively removes them from your estate. This means that in the event of legal action against you, these assets are generally beyond the reach of creditors and lawsuits, depending on the type of trust and how it is structured.


In Israel, even more than in the U.S., companies that believe you owe them money can put a hold on your bank account. Assets being held in trust are more protected. Additionally, suppose there are specific extended family members that you want to ensure can’t get access to your assets. In that case, a trust adds protection. As the famous line goes, “You use a trust when you don’t trust someone.”


Tax Planning


Maybe the most well-known reason is that trusts can also play a crucial role in tax planning, helping to minimize the estate, gift, and income tax liabilities for the grantor and beneficiaries. For U.S. citizens, the global reach of the U.S. tax system means that both domestic and international assets can be subject to taxation. By carefully structuring a trust, it’s possible to achieve significant tax savings and efficiencies.

As Israel doesn’t have an estate tax, and the U.S. limit is currently $13.61M per person, it is a unique time to use a trust to protect you from U.S. estate tax. At the end of 2025, this amount will go back to only half that amount, so now is a great time to act and set up that trust.
Additionally, a trust can allow your assets to grow outside your estate. At the same time, you keep the income in the trust and pay the taxes personally. This requires a deep understanding of the tax laws in both countries and should be undertaken with the guidance of experienced tax professionals. 


Planning for Incapacity


An often overlooked but critically important aspect of estate planning is preparing for the possibility of the grantor’s incapacity. Trusts can provide a seamless transition of asset management if you become unable to manage your affairs due to physical or mental incapacity. By appointing a trusted individual or institution as trustee, you can ensure that your assets are managed according to your wishes without needing court-appointed guardianship or conservatorship.

This feature is particularly relevant for U.S. citizens residing in Israel, where navigating legal systems in two countries can complicate matters. A well-structured trust can provide peace of mind, knowing that your assets are in good hands and that your welfare and beneficiaries are protected, regardless of what the future holds. It is important to note that setting up a power of attorney may be a cheaper option to accomplish similar goals.


Control Over Asset Distribution


Trusts offer unparalleled control over how and when your assets are distributed to your beneficiaries. This is especially useful in complex family situations or when setting specific conditions on inheritances. For example, you can stipulate that beneficiaries receive their inheritance at certain ages, upon achieving specific milestones such as graduating from university, or in periodic distributions to provide a steady income.

This level of control is invaluable for U.S. citizens in Israel who may have beneficiaries in different countries or who want to ensure that their wealth is passed down in a manner that encourages responsible financial behavior. Trusts can be tailored to reflect your values and objectives, offering a level of customization that other estate planning tools cannot match.


Charitable Intentions


For those with philanthropic goals, trusts can be an effective vehicle for charitable giving. Charitable Remainder Trusts (CRTs), for instance, allow you to receive a tax deduction and a stream of income for a period, after which the remainder of the trust assets go to your chosen charity. Similarly, charitable lead trusts (CLTs) allow a charity to receive income for a set period, with the remaining assets eventually passing to your beneficiaries.

This approach not only helps you achieve your philanthropic objectives but can also provide significant tax benefits. Using such a trust may help reduce potential double tax issues for U.S. citizens with ties to Israel. Our office has developed some really neat ideas recently, such as assisting clients in giving a lot to charity and still benefiting from excellent tax savings.


Privacy Concerns


In an era where privacy is increasingly valued, given things like the BOI reports, trusts offer a discreet way to manage and transfer wealth. Unlike wills, which become public documents once they enter probate, trusts operate in confidentiality. So, the details of your estate, including the assets, beneficiaries, and terms of distribution, remain private.


Special Needs Planning


Trusts are an indispensable tool for families with special needs members. A well-designed special needs trust can provide for the lifelong care of a disabled loved one. By setting aside assets in a trust, you ensure that these resources enhance the beneficiary’s quality of life while maintaining their access to essential public benefits.

This planning is crucial for families in the U.S. and Israel, but again, speaking to an expert in both areas of the tax sphere is important. Israel offers some significant tax benefits to those with special needs that the U.S. does not.


Considerations for those looking to Expatriate in Israel


For U.S. citizens residing in Israel, trusts are a key tool for achieving below-net-worth thresholds for expatriation purposes. This allows some to renounce their U.S. citizenship without paying the exit tax. Right now, before the reduction to the lifetime gifting amount at the end of 2025, it may be a perfect opportunity to use a trust to bring your net worth down and renounce your U.S. citizenship.


It’s advisable to work with tax professionals who are well-versed in the complexities of both jurisdictions. They can offer guidance tailored to your unique situation, ensuring your trust aligns with your estate planning goals while remaining compliant with the laws of both countries.

As with any complex legal strategy, personalized advice and planning are the key to successfully utilizing trusts. Consulting with professionals who understand the intricacies of both U.S. and Israeli regulations is crucial. With the proper guidance, a trust can be an invaluable tool in securing your financial legacy and providing for your loved ones, no matter where life takes you.


Next Steps


If you’re considering how a trust might fit into your estate plan or if you’re navigating the complexities of U.S./Israeli estate planning, we’re happy to help. Contact us for a consultation, and let’s explore how we can tailor a trust to meet your unique needs and goals.

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